why is the gold price falling?

my take on gold

I have strong views on gold.  I don’t think it’s money (it used to be, but isn’t anymore in most parts of the world).  It’s no more–and no less–an inflation hedge than any other physical asset like, say, real estate or timberlands or diamonds or oil.

One exception:  in developing countries where people want to hide their wealth or don’t trust the banking system and where barter is an accepted way of doing business.  In these cases, the facts that you can bury gold in the back yard or break off a link in a 99.9% gold chain and give it to a merchant to buy stuff come in handy.  Think:  India or Vietnam.  And, of course, these transactions, like most barter, are by and large off the books.

I began to realize this in the mid-1980s when I saw that my acquaintances in Hong Kong had long since dumped all their physical gold and had forex trading accounts instead.

worldwide gold demand is an emerging economy phenomenon

Worldwide consumer demand for gold by country in 2011, as reported by the World Gold Council, breaks out in tons as follows:

India     933.4

China     769.8  (Greater China = 811.2)

Middle East     199.8

US     194.9

Turkey     144.2

Thailand     108.9

Vietnam     100.3

Everybody else     957.3.

It’s also telling that in the US, where about one in five citizens don’t have a bank account (because it’s too expensive), we’re not set up for people to plunk down a doubloon to buy a used car.

sharply increasing money creation in the developed world

Be that as it may, over the past few months we’ve seen a substantial increase in government money creation in the EU and in Japan.  We’ve also just heard Mr. Bernanke reaffirm that he intends to keep interest rates in the US at the current extraordinary low levels for a long time to come, despite increasing signs that the economy is picking up steam.

All of this spells the increased possibility of a future inflation problem.  Why, then, is the gold price falling rather than going up?

trends in India

I think the largest part of the reason lies in India, which comprises well over a quarter of worldwide consumer demand for gold.  (If we reckon that purchases of 14k or 18k jewelry isn’t investment demand, then India alone could comprise as much as 40% of the global (non-central bank) investment market for gold.)

Two factors:

–as the economy in India has been cooling down over the past half year down and inflation picks up, Indian demand for gold has gone down, not up,

–perhaps more important, in its latest budget, the Indian government is proposing two new gold taxes:  a doubling of the import tax on the yellow metal to 4%, and a new .3% levy on all gold purchases.  In response to the latter, gold shops in India have closed down on strike for almost two weeks.

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